DISH Network Corp.'s $5 billion deal to acquire wireless assets from Sprint Corp. and T-Mobile US Inc. will transform the satellite company into a nationwide U.S. wireless operator, but analysts say it is unclear whether DISH needs — or can afford — all the assets it is buying.
As part of a settlement agreement with the U.S. Justice Department, T-Mobile and Sprint agreed to divest myriad wireless assets to DISH. This includes a $1.4 billion purchase of Sprint's prepaid businesses and a $3.6 billion agreement for 14 MHz of Sprint's low-band wireless spectrum. DISH plans to use these acquired assets to support its build-out of a next-generation 5G network, an investment that DISH Chairman Charlie Ergen said will cost an additional $10 billion.
Considering DISH's total debt load of $15.84 billion as of the end of the second quarter, Fitch Ratings Director Patrice Cucinello said that after the Sprint/T-Mobile deal, "DISH is ever more in need of finding a strategic or financial partner to fund its wireless strategy."
Ergen said during a July 29 earnings conference call that the company intends to get money for its network build from "a lot of different places." This includes existing cash on hand and future free cash flow from the satellite business.
He noted that the satellite business has consistently generated more than $1 billion a year in cash flow for years. The newly acquired prepaid business should add positive cash flow after the deal with Sprint closes. Ergen even suggested that he would be willing to put some of his own personal wealth into supporting the business, should it be required.
Given DISH's extensive spectrum holdings and the relatively small breakup fee associated with the spectrum asset portion of the divestitures, its commitment to buying the spectrum could waiver as expenses add up, S&P Global Ratings credit analyst Chris Mooney suggested.
The agreement stipulates that if DISH fails to deliver the $3.6 billion purchase price for the spectrum portfolio, its sole liability to the new T-Mobile will be paying a fee of about $72 million.
The satellite company would also have to pay the U.S. government $360 million. DISH could avoid that payment if it has deployed a core network and offered 5G service to at least 20% of the U.S. population within three years of the closing of the prepaid transaction.
"It doesn't seem like that is a hard commitment," Mooney said. "If they go ahead and start building out the network, this is essentially a call option for them on the spectrum."
Since 2008, DISH and its subsidiaries have directly or indirectly spent more than $21 billion on wireless spectrum licenses and related assets, as of the end of the second quarter. The figure does not include DISH's $5 billion deal with T-Mobile and Sprint.
DISH had long been viewed as a potential spectrum seller. But that possibility has virtually disappeared with the T-Mobile/Sprint agreement, according to MoffettNathanson pay TV and telecom analyst Craig Moffett.
As part of its proposed agreements with the federal government around the wireless deal, DISH has committed to not selling its primary existing spectrum licenses for six years.
"Dish is all-in as an operator, not a spectrum seller," Moffett said in a July 29 research note. He added that it is now "reasonable to wonder whether satellite TV or wireless should now be thought of as Dish's core business."
Thus, Moffett said investors must weigh the revenue and cash flow opportunities at DISH's planned wireless business.
In buying Sprint's prepaid brands, DISH will add about 9.3 million prepaid wireless customers. Yet a larger opportunity may lie in DISH offering wireless wholesale capacity to tech firms and other third parties once it deploys its own network, said Alex Besen, founder and CEO of the mobile data consulting firm The Besen Group LLC.
"They could be a very strong player in the market licensing wholesale capacity to Microsoft [Corp.], Apple [Inc.], Netflix [Inc.], Amazon[.com Inc.] [and] Google [LLC]," Besen said.
New Street telecom analyst Jonathan Chaplin is also bullish about a potential wholesale strategy. He said the value of such a business could be worth as much as $97 billion over the long term.
"We don't know whether DISH will focus on wholesale or retail, but the wholesale model is much easier to build," Chaplin said.
DISH said July 29 that it intends to slice its capacity to support both retail and wholesale revenue opportunities. DISH Executive Vice President of Corporate Development Tom Cullen pointed to the prepaid customers it will acquire on the retail side.
"That doesn't mean there still isn't other capacity that can be wholesaled ... and that could be to many different verticals, as well as 5G enterprise applications," Cullen said.